Walking the line on corporate tax cuts

That lobby groups for small business and chambers of commerce favour lower corporate tax rates is as unsurprising as news that unions want a higher minimum wage. What’s a bit surprising, though, is all the fuss being made about corporate tax cuts in this election since, in the great scheme of things, the corporate rate represents only one of many factors that influence business decisions.

Keeping the corporate rate at 18 per cent – rather than dropping it to 15 per cent, as the Conservatives are doing – is the centrepiece of the Liberals’ efforts to show how they can pay for their social policy promises. Carrying on with the tax cuts, reply the Conservatives, will be a job-creation machine.

To buttress this assertion, Prime Minister Stephen Harper has taken to quoting University of Calgary economist Jack Mintz, who favours the cuts and insists they’ll produce tens of thousands of jobs. We might remember, however, that Mr. Mintz was one of the intellectual authors of a carbon tax that Mr. Harper excoriated in the last campaign.

So let’s just say that, like all politicians, Mr. Harper is cherry-picking analyses he likes while discarding those he doesn’t, from exactly the same source.

Assuming that some relationship exists between the unemployment rate and corporate taxes, what does the evidence from the Organization for Economic Co-operation and Development say? The answer: no discernible links.

With an 18-per-cent corporate tax rate (that is, before the reduction) and varying provincial corporate rates, Canada stood in the mid-range of OECD countries. A handful – the Netherlands and South Korea being two – had both lower corporate tax rates and lower unemployment rates than Canada, evidence for the Conservatives’ position. Other countries, such as Australia, Germany and Japan, had higher corporate tax rates and lower unemployment rates than Canada. Still others, such as the United States, had both higher corporate tax rates and higher unemployment rates. Britain’s rates were roughly comparable with those of Canada.

So, on the face of it, no direct link exists between corporate taxes and unemployment rates. Similarly, there are a host of factors that enter into company equations about locating plants, hiring workers and making investments. Indeed, recent Statistics Canada data show that, far from investing with money presumably made from lower tax rates, companies had been hoarding the cash.

U.S. companies with affiliates in Canada must report taxes on their worldwide income. So, for them, the Canadian corporate rate is of little concern. For others, the retained earnings from lower corporate taxes are nice to have but don’t amount to very much in the broad sweep of company inputs and outputs.

That said, Canada does have to make sure that its rates don’t push into the upper reaches of international corporate tax rates, because capital (unlike much of labour) is mobile. In the best possible world, the corporate rate should be toward the bottom of the list to attract investment. But what really counts is being competitive – which is what the Canadian rate would be wherever it stands in the 15-per-cent to 18-per-cent range.

Thus the NDP’s proposal to raise the corporate tax rate to 19.5 per cent is a move in the wrong direction. You can defend dropping the rate, as the Conservatives are doing, or even not dropping it from where it was, as the Liberals are proposing, but to raise the rate in a competitive world of mobile capital is unwise.

But, of course, the NDP needs massive revenues to pay for almost $15-billion of platform promises between now and 2014-2015, and large corporations have always been the party’s favourite target. The NDP figures it can get $10-billion from the corporations without any impact on their behaviour, a very dubious proposition indeed.

Parties, like provincial governments, are kidding themselves and, by extension, their electorates. Play with corporate rates all they like, governments are going to need more, not less, money to deal with an aging population. These costs – $2-billion to $3-billion a year for health care alone – will dwarf all the effects of corporate tax adjustments.